Fair Political Practices Commission
M E M O R A N D U M

To: Chairman Getman, Commissioners Deaver, Makel, Scott, and Swanson
        Fair Political Practices Commission

From: Mark Krausse, Staff Counsel, Legal Division,
                Luisa Menchaca, Assistant General Counsel
                Kathy Gnekow, General Counsel

Subject: In re Galligan (O-00-045); Supplemental Memorandum Regarding Application of Regulation 18706.

Date:     May 2, 2000

I. INTRODUCTION

This staff memorandum is intended to serve as a supplement to the staff memorandum entitled "In re Galligan (O-00-045); Application of Regulation 18706," dated April 25, 2000. It provides further analysis of how the options presented to the Commission in the original memorandum will affect the ability of the Enforcement Division to enforce the conflict of interest provisions of the Political Reform Act (the "Act").⁽¹⁾

The Galligan opinion request is before the Commission to resolve the confusion that has arisen regarding Section 87103 and Regulation 18706. The Commission traditionally has interpreted Section 87103 as containing what is referred to in this memo as "simple causation." However, there has been some suggestion that Regulation 18706, approved by the Commission in November of 1998, signaled a change toward a "proximate cause" test. Reasonable minds might read Section 87103 either way. The Commission is asked to clarify through this opinion whether it interprets the section and the regulation to allow for the use of a proximate cause standard where circumstances warrant.

II. THE ENFORCEMENT IMPLICATIONS OF DEFINING THE CAUSAL CONNECTION IN SECTION 87103 AS "SIMPLE CAUSATION" OR "PROXIMATE CAUSATION"

Two interpretations of Section 87103 were presented in the April 25, 2000 memorandum regarding the issue of "causation." The perspective referred to in that memo as the "limited-view" or "non-comparative" interpretation is in this memo characterized as "simple causation." The second was "proximate cause" or the "but for" interpretation. Each of these standards of causation is analyzed below.

A. Simple Causation

The causal element in Section 87103, the link between the decision and the effect, has traditionally been viewed as simple causation. This standard of causation derives from Section 87103, which provides:

"A public official has a financial interest in a decision within the meaning of Section 87100 if it is reasonably foreseeable that the decision will have a material financial effect, distinguishable from its effect on the public generally, on the official, his or her immediate family, or on [one or more of the official's economic interests]." (Emphasis added.)

The simple causation interpretation is consistent with the language of the statute. Under this interpretation, the plain meaning of Section 87103 is the following: if it is reasonably foreseeable that the decision will have a financial effect on an official's economic interest, the official may have a conflict if the financial effect on the economic interest is material and if the financial effect on the economic interest is indistinguishable from its effect on the public generally.

This standard has been the way the Legal and Enforcement Divisions have viewed causation for 25 years, even though the Commission has not issued an opinion or an advice letter directly on point. This standard of causation has proven to be simple to understand and enforce. There have been no problems, of which Enforcement Division staff is aware, in applying this standard.

B. Proximate Cause

The proximate cause or "but for" interpretation is discussed as an alternative standard, a new way to view the causal connection element in Section 87103. It states that an official has a conflict of interest only if it is reasonably foreseeable that the financial effect on the official's economic interest would not have occurred but for the governmental decision.

The proposed proximate cause standard may be supported by the wording of Regulation 18706, which, in further defining Section 87103, states:

"A material financial effect on an economic interest is reasonably foreseeable, within the meaning of Government Code Section 87103, if it is substantially likely that one or more of the materiality standards (cites) applicable to that economic interest will be met as a result of the governmental decision." (Emphasis added.)

Regulation 18706 was promulgated as part of Phase 1 of the Commission's conflict-of-interest project. Phase 1 reorganized the existing conflict-of-interest regulations into a more easily understandable 8-step approach. It did not intend, however, to make substantive changes in the regulations; those changes are under discussion now in Phase 2. Nonetheless, it has been suggested that Regulation 18706, and the statute itself, require a the proximate cause test. Otherwise, it is argued, public officials may find themselves disqualified when the governmental decision is not the actual cause of the financial effect on the official's economic interest.

While it might be more flexible, the proximate cause standard of causation is more complicated for public officials to apply. Moreover, from an enforcement perspective, it adds an additional burden of proof. Under a proximate cause interpretation, the Enforcement Division will not only have to show, by a preponderance of the evidence, that it is reasonably foreseeable that the decision will have a material financial effect on the official's interest, indistinguishable from its effect on the public generally -- as is the situation now -- but will also have to prove, by a preponderance of the evidence, that it is not reasonably foreseeable that the financial effect on the official's economic interest will be the result, in whole or in part, of some other causative factor.

Furthermore, the proximate cause standard of causation opens up other issues. A criminal statute specifically requiring proximate cause, Vehicle Code section 23153, is illustrative of this point. Vehicle Code section 23153 provides criminal penalties for a person driving under the influence of alcohol who does an act that proximately causes bodily injury to another person. In a criminal prosecution, the district attorney must show not only that the defendant caused injury to another person while driving under the influence, but also that the injury would not have happened but for the fact that the defendant was driving under the influence. Thus, the prosecutor must show that regardless of the defendant's own wrongdoing, other possible causes for the accident, such as mechanical failure, bad road conditions, a deer in the road, or some other (possibly wholly concocted) excuse was not the proximate cause of the accident.⁽²⁾ This then becomes the focus of the prosecution. Enforcement of simple conflicts violations may result in disputes over extraneous issues. If a proximate cause standard is in place, a public official who has a financial interest in a decision may argue that other causes account for the effect on the value of his or her assets.

In short, adoption of a proximate cause standard will make conflict of interest violations more difficult to prove and more time consuming and costly to investigate. It also will make it more difficult for officials and enforcement staff alike to determine whether a conflict exists.

III. APPLICATION OF THE SIMPLE CAUSATION AND PROXIMATE CAUSATION STANDARDS TO COUNCILMEMBER GALLIGAN'S FACTS

Applying these alternative standards to the facts as they are presented by Councilmember Galligan will produce the following results:

A. Application of the Simple Causation Standard

Applying the simple causation standard to the facts and presumptions before the Commission, the inquiry is whether it is reasonably foreseeable that the Burlingame City Council's decision will cause a material financial effect on Councilmember Galligan's economic interest, Mid-Peninsula Bank (MPB). Applying the materiality standard found in Regulation 18705.1(b)(2)(A)⁽³⁾, the councilmember will have a disqualifying conflict of interest if it is substantially likely that the council's decision will cause an increase or decrease in MPB's gross revenues of $150,000 or more in a fiscal year.

Councilmember Galligan's letter requesting an opinion informs the Commission that "[If] the project is approved by the City Council, the entire loan from [MPB] would be paid off when construction starts . . . ." If the project is not approved, the councilmember says, the property will either be sold and the loan repaid from the proceeds of sale, or another use will be found, with construction financing repaying the existing loan. Based upon annual interest of $500,000, the bank will lose $150,000 or more in gross revenue if the loan is paid off at any time prior to October 17, 2000. Furthermore, according to the Burlingame Planning Department, if the city council approves the project, and barring delays due to lawsuits or other unforeseen possibilities, construction may begin on or about July 20, 2000. Given the facts provided by the councilmember and the city's planning department, it is substantially likely that the loan will be paid off early enough to cause a material financial effect on MPB.

Under the simple causation standard, the Burlingame City Council's decision on the 301 Airport Boulevard project will have a reasonably foreseeable material financial effect on Councilmember Galligan's economic interest, MPB, and the councilmember will be disqualified from participating in that decision.⁽⁴⁾

B. Application of the Proximate Causation Standard

Just as under the simple causation analysis, it appears substantially likely that the city council's decision to approve the project will cause a material financial effect on MPB in the form of early repayment of the loan. But the proximate cause inquiry does not end with the question of whether the decision will cause a material financial effect on the councilman's economic interest. The second inquiry is whether that effect is one that would not occur but for the council's decision to approve the project. Here the councilmember contends that the same effect will ensue in the event the council were to reject the project, because in that event, Glenborough will either sell the land or find another use that does not require city approval. In either event, the councilmember contends, it is substantially likely that the bridge loan will be repaid early.⁽⁵⁾

Since under this analysis it cannot be said that early repayment of the loan and the consequent loss of $150,000 or more in interest income to MPB would not have occurred but for the city council's decision to approve the project, the decision will not be the proximate cause of the effect on the councilmember's economic interest and he will be allowed to participate in the 301 Airport Boulevard project decision.

IV. STAFF RECOMMENDATIONS

The Legal Division believes the language of Section 87103 and Regulation 18706 can be read to support either the simple causation standard or the proximate causation standard. In light of this, it feels the decision of which standard to choose must be made based upon a weighing of the competing policy considerations--the harshness of disqualification in some instances balanced against the complications of interpreting and enforcing a new and more burdensome standard.

The Enforcement Division recommends against the proximate causation standard based upon the difficulty of enforcing the conflicts provisions under such a test and the fact that it unnecessarily complicates conflict analysis for public officials. It recommends instead that the Commission retain the current simple causation standard. In light of these concerns, the Legal Division recommends supporting Enforcement's interpretation of the causation standard.